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able regulation can remove, leaving the sound body to continue its beneficent public service. May I not suggest for your careful consideration that Federal regulation of holding companies has never even been tried. Is it not the part of wisdom and statesmanship to give it a trial first before definitely legislating to destroy the patient? There will be many future sessions of the Congress, and if the regulation (never before tried) proves efficacious the holding companies may be allowed to continue to perform their essential useful function in the public service; if the regulation after that trial period fails, then will be time enough to consider the death sentence.
Most of the holding companies and my own is one of them-are entirely solvent, not bery prosperous but solvent. If allowed to live, with regulation set up to curb possible abuses, most of the holding companies now surviving may expect to earn a return on the cash furnished by them and in turn invested by the holding companies in sound operating company property. Congress is in a position to help materially in the longed-for business recovery by withholding the hand of destruction for the holding companies and instead giving them the helping hand of firm regulation. Respectfully yours,
C. W. KELLOGG, Chairman.
BRIEF SETTING FORTH BENEFITS OF THE HOLDING COMPANY TO ITS OPERATING SUBSIDIARIES AND THEIR CUSTOMERS AND TO THE INVESTORS IN SECURITIES OF ITS SUBSIDIARIES SUBMITTED BY ENGINEERS PUBLIC SERVICE CO.
FORMATION OF COMPANY Engineers Public Service Co., a public-utility holding company, was formed June 23, 1925, under the laws of Delaware. It was originally financed by the sale of 400,000 shares of no par common stock at $11.875 per share and 200,000 allotment certificates at $100 per certificate. Each of these certificates, when fully paid, was convertible into one share of $7 dividend preferred stock and onehalf share of common stock. Warrants for the purchase of 200,000 additional shares of common stock at a price of $25 per share (scaling upward over a period of time and expiring in 772 years) were also included as part of the consideration in this original financing.
FURTHER FINANCING AND ISSUANCE OF SECURITIES The company used the cash realized from the sale of the above-mentioned securities and other stocks subsequently sold, principally for the purchase of the stocks of utility companies, which companies became its subsidiaries, and for loans to these subsidiaries after acquisition and for additional cash investment in their common stocks to strengthen their capital structures and enable them to obtain senior financing at lower cost.
In addition to those securities sold for cash, the company issued preferred and common stocks in direct exchange for common stocks of utility companies.
Stocks were sold for cash in the total amount of $55,107,549 (excluding the refunding operation in 1928 mentioned hereafter) and were issued in exchange for securities of utility companies, now subsidiaries, in the total amount of $38,037,861. (For complete detail see exhibit A, p. 22.) Each time exchanges were made the securities issued in exchange were entered on the books of Engineers Public Service Co. at somewhat less than their market value on the New York Stock Exchange at the time of the particular exchange.
ACQUISITION OF SUBSIDIARIES Over 99 percent of the total common stocks of the following subsidiaries was acquired in the manner shown below. The subsequent investment by the parent company in the common stocks of these companies was for the purpose of broadening their equity bases and improving their financial positions.
1 Excluding $5,263,498 write-up of this investment in 1928 described on p. 6.
In addition the company formed 2 subsidiaries. See paragraphs under "Other subsidiaries."
In addition, Eastern Texas Electric Co. purchased the preferred and common stocks of Nebraska Electric Power Co. for $445,741 in 1927. In order to simplify the corporate structure, the latter company in 1929 was, in effect, merged with the Western Public Service Co., another subsidiary, serving a contiguous area.
With the exception of Virginia Electric & Power Co. and the Nebraska Electric Power Co., all the above companies were under the supervision of Stone & Webster Service Corporation prior to acquisition.
Engineers Public Service Co. has two other direct subsidiaries which were not acquired but were formed by the company. In 1929 Louisiana Steam Generating Corporation was formed to construct and operate a steam and electric generating plant at Baton Rouge, La., to furnish steam and electricity to the Standard Oi Co. of Louisiana and electricity to Baton Rouge Electric Co. and Gulf States Utilities Co. (subsidiary of Eastern Texas Electric Co. (Delaware)). A descrip tion of this interesting example of cooperation between diverse industries for their mutual advantage is not pertinent in this statement but is included as a matter of interest in supporting data, exhibit B, page 23.
In 1931, Engineers Securities Corporation was formed to hold securities owned by Engineers Public Service Co. of companies not controlled by the Engineers Co.
The total investment of Engineers Public Service Co. in securities of these two companies, representing cash paid in, is as follows:
Common stock Louisiana Steam Generating Corporation..
$3, 170, 000 Engineers Securities Corporation --
3, 936, 111
7, 106, 111
OTHER INVESTMENTS IN SUBSIDIARIES The company owns preferred stocks of its subsidiaries in the amount of $1,275,009 at cost.
TOTAL PRESENT INVESTMENT IN SUBSIDIARIES
In companies originally acquired from other owners.
$85, 786, 083 LOANS AND OTHER ASSISTANCE TO SUBSIDIARIES The company has always considered that it was its duty, when possible, to support its subsidiaries when they were in need by furnishing funds to enable them to extend and improve their service and to make necessary additions to plant. Such loans have been exceedingly helpful, particularly to the smaller subsidiaries which at times have been unable to borrow sufficient amounts from the banks or to raise needed funds in the security markets. At no time has interest in excess of 6 percent per annum been charged on such loans. There are no "upstream" or "sidewise" loans or other improper financial support between the company and its subsidiaries or between subsidiaries. The company's "revolving" fund used for loans to subsidiaries at one time reached $19,490,000, and at present it has loans to subsidiaries totaling $9,830,000. In a number of cases, when it seemed desirable to increase the equity base of the subsidiary, the company has accepted common stock in exchange for the loan, thus making additional investment in the equity of the subsidiary. A list of subsidiaries to which loans have been made, the maximum loan and the present loan to each, follows:
Total investment in subsidiaries...
7, 106, 111 1, 275, 009
94, 167, 203
1 Includes $5,263,498 write-up of investment in Virginia Co. described on p. 6
The effect of this financial support can best be understood by considering what it has accomplished with respect to an individual subsidiary. At the time of acquisition in 1926, the Savannah Electric & Power Co. was operating generating equipment considerably less efficient than could then be constructed and, in addition, needed more capacity, but its financial condition was such that it could not raise economically the needed money. Its financial structure clearly shows this condition. This company's first and refunding mortgage bonds had coupon rates of 6 and 742 percent. It had debenture stocks carrying 7- to 8-percent dividend rate. These securities needed support by an increase in the common-stock investment.
Immediately upon acquisition of this company from its former scattered owners, Engineers Public Service Co. advanced money for the building of an efficient addition to the Savannah Co.'s power plant. This loan, to the extent of about $600,000, was soon converted into equity by taking up the loan in common stock, after which the Savannah Co. was able to sell $1,700,000 of 3-year, unsecured 5-percent notes on an attractive basis to complete this construction. These short-term securities were sold with the idea of later completely refunding the company's debt to reduce its charges as soon as the economies from the new plant and earnings from new business should increase the net earnings to a point where such refunding could be done advantageously.
Actually, when these notes came due in 1929, the security markets were not favorable for such refunding because interest rates were high, and the Engineers Co. again stepped into the breach and advanced money to pay off these notes at maturity. Some of this debt has been paid off from earnings, and the balance has been carried since that time by the Engineers Co., awaiting circumstances favorable for refunding.
There can be no doubt that in the manner shown above the Engineers Co. has enabled the Savannah Co. to furnish better service to its customers on a more reasonable basis than would have been possible without this assistance.
Another instance of benefit to the subsidiaries from holding-company ownership has arisen in connection with the filing of consolidated returns for Federal income tax purposes. By filing such a consolidated return for 1932 a proper saving of $219,308 was effected which saving was distributed to all those companies having taxable balances, which were included in the consolidated return. This proper saving in taxes could only be made by virtue of the common ownership by the holding company, but it had the effect of reducing the cost of operation of the subsidiaries affected. This saving and its specific effect on the Virginia Co. is discussed more fully on page 66 of exhibit C.
OWNERSHIP OF SECURITIES
The Engineers Co. has been largely financed through recourse to the general security markets. Prior to April 1930, at which time Stone & Webster, Inc., acquired over 90 percent of the common stock in exchange for shares of its own capital stock, the ownership of all of Engineer's securities was widely scattered.
In order to indicate where the ownership lies, we are presenting below an analysis of the ownership of Engineer's preferred stock as of February 5, 1935.
I. Analysis by type of owner
Trustees, insurance companies, fraternal and educational organizations, guard
ians, and others acting in fiduciary capacities.....
REFINANCING OF $7 DIVIDEND PREFERRED In 1928, because of improvement in the credit of the company and in general market conditions, it became possible for the company to sell a $5 dividend convertible preferred stock and thereby replace the $7 dividend preferred stock then outstanding in the amount of 311,662 shares. The immediate saving in dividend requirements was $580,000 annually. However, such an operation required the acceptance of a charge to surplus of over $5,000,000 to cover the difference between the paid-in value of the $7 dividend preferred averaging $93.72 per share and the call price of $110 per share. The company was less than 3 years old and although it had paid no dividend on its common stock, it had not accumulated sufficient surplus to meet such a charge regardless of the desirability of making the saving. Under these conditions the directors of the company decided to revalue and write up the company's investment in its largest subsidiary, Virginia Electric & Power Co., to create sufficient surplus to cover this charge. The new value set on the investment in the Virginia Co. was conservative by any standard of relative values at the time. It should be clearly noted that this write-up had no effect on the Virginia Co. itself for rate purposes or any other purpose and in no way appears on the books of that company. Having made this revaluation, it was then possible to call the outstanding $7 dividend preferred stock and refund it largely through the sale of 320,000 shares of $5 dividend convertible preferred stock.
This transaction is described in detail because it is the only case in the history of the Engineers Co. where it made any write-up of assets on its own books, and it believes that under the circumstances this write-up was justified by the resulting substantial savings in dividend requirements.
ACQUISITION OF COMPANY BY STONE & WEBSTER, INC. From its formation in 1925 until April 1930, the common stock of Engineers had been broadly held. On the latter date the company had about 10,000 common stockholders, the largest of which was Stone & Webster, Inc., owning 328,538 shares or 17.4 percent of the total outstanding common. At that time Stone & Webster, Inc., made an offer to acquire all outstanding common stock of the Engineers Co. through an exchange offer of its own capital stock. By this offer it raised its percentage of ownership in the common stock to more than 90 percent of the total outstanding.
SUPERVISION OF OPERATIONS
Prior to the acquisition of voting control by Stone & Webster, Inc., in March 1930, the Engineers subsidiaries employed Stone & Webster Service Corporation, & subsidiary of Stone & Webster, Inc., to supervise the operation of their properties and paid for this supervision a fee which included a reasonable profit to the Service Corporation. All the companies acquired had been under the supervision of the Service Corporation prior to their acquisition by Engineers Public Service Co., with the exception of Virginia Electric & Power Co. and Nebraska Electric Power Co., and the supervision arrangements were merely continued. FORMATION OF THE MUTUAL SERVICE Co., ENGINEERS PUBLIC SERVICE Co., Inc.
After Engineers became a subsidiary of Stone & Webster, Inc., Engineers Public Service Co., Inc., a mutual service company, was set up, owned pro rata entirely by the supervised operating subsidiaries, to furnish services and supervision on a nonprofit basis. This company on May 1, 1931, took over the work formerly handled by Stone & Webster Service Corporation with respect to Engineers subsidiaries.
SERVICES FURNISHED BY ENGINEERS Public SERVICE CO., INC.
It has been the policy (and should be clear from the brief review given below of the various services furnished by this nonprofit organization) to leave to the subsidiary organization in the field every function that does not clearly show savings or advantages from centralized handling.
In the cases where these services are furnished as joint facilities with Stone & Webster, Inc., or any of its subsidiaries, the charges are allocated on an approximate cost basis to those receiving the service.